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Trust Funds

Construction payments made to a contractor, subcontractor, or to an officer, director, or agent of a subcontractor or contractor pursuant to a construction contract for the improvement of specific real property are deemed to be trust funds for certain purposes. Similarly, loan receipts are trust funds if (1) the funds are borrowed by a contractor, subcontractor, or owner or by an officer, director, or agent of a subcontractor, contractor, or owner for the purpose of improving specific real property, and (2) the loan is secured in whole or in part by a lien on the property. However, if a contractor and property owner have entered into a written construction contract for the improvement of specific real property in Texas before the commencement of construction of the improvement, and the contract provides for the payment by the owner of the costs of construction and a reasonable fee specified in the contract payable to the contractor, the fee paid to the contractor is not considered trust funds.

There are two sources of trust funds. First, all money paid to a contractor or subcontractor under a construction contract for the improvement of specific real property in Texas constitutes a trust fund. Second, all funds borrowed by an owner, contractor, or subcontractor for the purpose of improving such real property, and which are secured in whole or in part by a specific lien on the realty to be improved, are trust funds. A contractor who enters into a written contract with a property owner to construct improvements to a residential homestead for an amount exceeding $5,000 must deposit the trust funds in a properly designated construction account in a financial institution.

Of course, if a contractor or other party in possession of trust funds misuses the funds, that party is liable under the trust fund provisions. If, however, the funds are transferred or otherwise assigned to some innocent third party without knowledge that the funds are trust funds under the statute, a claimant to the trust funds may not sue to collect the funds in the hands of the innocent third party.

The statutes creating and governing the trust fund do not apply to the following: (1) a bank, savings and loan, or other lender; (2) a title company or other closing agent; or (3) receipts under a construction contract if the full contract amount is covered by a corporate surety payment bond. Thus, the trust fund statutes will not defeat a bank’s priority as a secured creditor over a material man.

Any subcontractor, contractor, owner, or any officer, director, or agent of any of those parties to the contract that receives trust funds or payments or has control or direction over them is a trustee of the trust fund. Moreover, a trustee may be personally liable to a beneficiary of the trust for misapplication of the trust fund.

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